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Kingston Communications (Hull) Plc Ors v. Stargas Nominees Ltd & Ors [2004] ScotCS 270 (17 December 2004)

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Marnoch

Sir David Edward, Q.C.

A1576/03

A1590/03

OPINION OF THE COURT

delivered by TEMPORARY JUDGE SIR DAVID EDWARD

RECLAIMING MOTIONS

in the cases of

(1) KINGSTON COMMUNICATIONS (HULL) plc

Pursuers and Reclaimers;

against

STARGAS NOMINEES LIMITED

First Defenders and Respondents;

and

CONVERGYS EMEA LIMITED

Second Defenders and Respondents;

and

(2) STARGAS NOMINEES LIMITED

Pursuers and Respondents;

against

KINGSTON COMMUNICATIONS (HULL) plc

Defenders and Reclaimers:

_______

Act: Keen, Q.C., Weir; Maclay Murray & Spens (Kingston)

Alt: Martin, Q.C., Higgins; Fyfe Ireland (Stargas): Webster; Shepherd & Wedderburn (Convergys))

17 December 2004

The factual and procedural context
[1] These reclaiming motions concern two parallel actions. The first is at the instance of Kingston Communications (Hull) plc ("Kingston") against Stargas Nominees Ltd ("Stargas") and Convergys (EMEA) Ltd ("Convergys"). The second action, to which Convergys is not a party, is at the instance of Stargas against Kingston. The points at issue in the two actions are essentially the same.

[2] After debate the Lord Ordinary dismissed Kingston's action and, subject only to determination of quantum, granted decree de plano in favour of Stargas. Kingston has reclaimed in both actions.

[3] The debate in the Outer House and the reclaiming motions in the Inner House were conducted on the basis of the pleadings and a limited number of documents. Some of the facts - in particular, some important dates - are not known or at least not admitted. The salient facts, so far as available, are as follows.

[4] In 1997 Kingston granted a Guarantee in favour of Stargas in respect of a Lease by Stargas of office premises in Edinburgh to a subsidiary of Kingston, Kingston SCL Ltd ("KSCL").

[5] In 2000 a German company Telesens AG acquired the whole share capital of KSCL, whose name was then changed to Telesens KSCL Ltd. On 26 June 2002 Telesens KSCL Ltd went into receivership. On 12 July 2002 the joint receivers changed the company name to TK Realisations Ltd.

[6] At some time "in or about July or August 2002" the receivers sold the business of TK Realisations Ltd to Convergys who took occupation of the subjects of the Lease. It is not clear when Stargas first became aware that Convergys had taken occupation of the subjects, but it appears that agents for Stargas participated in discussions with Convergys and the receivers about the possibility of an assignation of the Lease to Convergys.

[7] On 14 October 2002 the joint receivers sent a letter to ATIS Real Weatheralls Ltd ("ATIS") in London, apparently (though it is not stated) as agents of Stargas:

"As you are aware, Convergys EMEA are currently occupying the property at 5 Lochside Avenue under a licence of occupation from the Joint Receivers of TK Realisations Limited.

As agreed with Convergys EMEA, please find enclosed a cheque in the sum of £398,548.84 representing rental payments for the period 28 May 2002 to 27 November 2002.

Please note that payment of this rent merely constitutes forwarding on payments received from Convergys EMEA and the Joint Receivers are not adopting the lease and are acting without personal responsibility."

[8] On 21 October 2002 solicitors for Stargas wrote to the receivers by recorded delivery:

"We act on behalf of [Stargas], the Landlords under the Lease between [Stargas] and Kingston SCL Limited (now TK Realisations Limited (in receivership)) ... ('the Lease').

Your letter dated 14th October ... has been passed to us. The Receivers' cheque in the sum of £398,548.84 is acknowledged and accepted as payment of rent due under the Lease for the period 28^th May to 27^th November 2002. Please note that there continue to be arrears under the Lease in respect of service charge and insurance as previously intimated.

We note that you are indicating that you are not adopting the Lease. Notwithstanding your statement, on behalf of our said clients, we hereby call upon you, as Joint Receivers of TK Realisations Limited, formally to adopt the Lease.

We also note your reference to the fact that Convergys EMEA are currently occupying the above property under a Licence from the Joint Receivers. Please note that our said clients have not granted any consent to such occupation and as such TK Realisations Limited (in Receivership) is currently in breach of the alienation provisions of the Lease."

[9] On 22 October 2002 a solicitor, apparently then acting for the receivers, replied by email:

"I assume that the reference to adopting the lease means accepting personal responsibility for all of the lease obligations, past, present and future (until an assignation). The receivers will not be doing so.

I will be making Convergys aware of the position of your clients regarding the occupation of the premises."

[10] On 6 December 2002, the receivers sent a letter to ATIS in the same terms as their letter of 6 October enclosing a cheque for £206,206.92 "representing rental payments for the period 28 November 2002 to 27 February 2003". The cheque was not cashed.

[11] It appears that, in the meanwhile, Stargas had taken up the matter of Kingston's liability under the Guarantee, and Kingston contended that the Guarantee had lapsed. On 16 December, new solicitors for the receivers wrote to Stargas' solicitors advancing a number of arguments in support of that proposition. (That letter is not produced.). On 10 January 2003, Stargas' solicitors sent a long letter replying to those arguments and calling on Kingston (1) to make payment of current arrears of rent, insurance, common expenditure charge and interest, and (2) to execute a new Lease in the same terms as the existing Lease.

[12] Kingston, in its action, concludes for declarator, first, that Stargas has granted a lease in favour of Convergys

"as evidenced by occupation by [Convergys] of the subjects of lease and acceptance by [Stargas] from [Convergys] of rent for the period 28^th May 2002 to 27^th November 2002";

second, that, by granting that lease, Stargas has renounced the lease in favour of Kingston; and third, that, by virtue of the lease in favour of Convergys, Kingston's obligations under the Guarantee have been extinguished. (The third conclusion was amended at the Bar at the end of the hearing in the Inner House.)

[13] Stargas, in its action, concludes, first, for declarator that Kingston is obliged to comply with the obligations in the Guarantee and, in particular, (i) to make payment to Stargas of all sums due in respect of rent, service charge, insurance premiums and interest due in terms of the Lease between Stargas and KSCL, and (ii) to accept a lease of the subjects "for a period commensurate with the residue of the duration of the Lease ... , the said new lease to take effect from 22 October 2002". Stargas concludes, second, for payment of a sum said to be due as arrears and, third, for decree ordaining Kingston to accept a lease of the subjects "to take effect from 22 October 2002".

[14] After debate, the Lord Ordinary dismissed Kingston's action and granted decree in favour of Stargas in terms of its first and third conclusions.

The terms of the Lease and Guarantee
[15] The Lease and the Guarantee are, generally speaking, in terms appropriate to a lease of commercial property to a subsidiary company with a guarantee by the parent company of the subsidiary's obligations as tenant. The arguments turn primarily on Clause 7 of the Lease and Clause 6 of the Guarantee.

[16] Clauses 4.28.1 and 4.28.2 of the Lease require the Tenants not to assign the Lease nor to part with or share possession or occupation except with the prior written consent of the Landlords.

[17] Clause 7 of the Lease is an irritancy clause and, so far as material, provides as follows:

"If the ... Tenants (being a corporation) shall ... have a receiver ... appointed ... then ... it shall be in the power of the Landlords by notice to bring this Lease to an end forthwith without any declarator or process of law to that effect and to remove the Tenants from possession of the Premises, and repossess and enjoy the same as if this Lease had not been granted and that without prejudice to any other remedy of the Landlords in respect of any antecedent breach of any of the Tenants' obligations hereunder, and under reservation of all rights and claims competent to the Landlords in terms of this Lease (including for rent, insurance premiums and other monies due to the date of such removal and termination), which irritancy is hereby declared to be pactional and not penal and shall not be purgeable at the bar.

Provided always, however, that in the case of a breach, non-observance or non-performance by the Tenants which is capable of being remedied, the Landlords shall not exercise any such option to irritate this Lease unless and until they shall first have given written notice to the Tenants and to any Guarantors and any chargeholder whose interest has been notified to the Landlords ... Notwithstanding the foregoing in the case of the Tenants ... suffering a receiver ... to be appointed, the Landlords shall allow a ... receiver ... a period of six months in which to dispose of the Tenants' interest in this Lease and shall only be entitled to terminate this Lease if the ... receiver ... shall have failed to dispose of the Tenants' interest at the end of the said period provided always that the ... receiver ... shall within twenty one days of his appointment personally undertake by probative writing to implement the full responsibility for payment of the rent (whether due in respect of a period occurring before or after the date of ... receivership ... ) and for the performance of all other obligations of the Tenants under this Lease from the date of ... receivership ... to the date of disposal or termination of this Lease including settlement of any arrears of the rents and the performance of any outstanding obligations which may subsist at the date of ... receivership ... and it is hereby declared that the Landlords shall deal with any request for consent to assign this Lease made by such ... receiver ... in the same manner as if the request had been made by the Tenants."

[18] Kingston founded particularly on the sentence in the second paragraph beginning "Notwithstanding the foregoing" (hereafter referred to as "the Notwithstanding clause").

[19] Under Clauses 2 and 3 of the Guarantee the Guarantors bind themselves, as cautioner, co-obligant and full debtor, to free, relieve and indemnify the Landlords in respect of all losses, damages, costs and expenses sustained through the default of the Tenants. Clause 4 provides that the liability of the Guarantors shall be

"an independent obligation continuing in force while any liability or provision under the Lease remains wholly or partially undischarged or unimplemented",

and that the Guarantors' liability

"shall not be released or in any way impaired or prejudiced by ... (ii) the Landlords giving time or any other indulgence to the Tenants ...[or]...the Landlords' act or omission or any other matter or thing whatever whereby (but for this provision) the Guarantors would be exonerated either in whole or in part from this Guarantee".

[20] Clause 6 of the Guarantee, so far as material, provides:

"As a separate and independent stipulation, the Guarantors hereby undertake and bind and oblige themselves that they shall at all times during the subsistence of this Guarantee procure the performance of the whole obligations, stipulations and others on the part of the Tenants contained or referred to in the Lease and that even in the event and notwithstanding that the Tenants shall .... have a ... receiver ... appointed ... the Landlords shall in addition to and without prejudice to their rights and remedies under the Lease, be entitled to exercise against the Guarantors as sole or principal debtor in respect thereof such remedies as the Landlords would be entitled to exercise against the Tenants in terms of the Lease in respect of any breach or contravention of or failure to comply with the terms thereof by the Tenants. The Guarantors further bind and oblige themselves that if ... the ... Receiver ... shall refuse to adopt or shall otherwise disclaim the Lease ... then ... if the Landlords shall by notice served upon the Guarantors within three months after such refusal or disclaimer ... so require, the Guarantors shall accept a lease of the Leased Subjects for a period commensurate with the residue which if there had been no refusal or disclaimer ... would have remained of the duration of the Lease, at the same rent and subject to like obligations and conditions as are contained in the Lease ..."

The arguments for Kingston
[21] Kingston's primary argument was that, given the terms of the receivers' letter of 14 October 2002, acceptance by Stargas of the cheque sent with that letter constituted acknowledgement of the existence of a lease between Stargas and Convergys. Since two leases of the same subjects could not subsist side by side, this put an end to the lease in favour of KSCL and, consequently, to Kingston's guarantee of that lease.

[22] In support of that proposition, Kingston founded on the speeches of Lord Fraser and Lord Keith in Morrison-Low v Paterson, 1985 S.C. (H.L.) 49. In that case, although neither party was aware of the true legal position, it was held that a lease existed (see especially Lord Keith at page 78). Lord Fraser said that it was "impossible to treat the appellants as mere squatters" (page75).

[23] In the present case, Convergys were clearly not "mere squatters". The letter of 14 October showed that rent was being tendered by the receivers as agents for Convergys. Stargas had accepted Convergys' occupation of the subjects and accepted the rent so tendered in respect of a period extending to 27 November 2002. Since there was no other "legal pigeon-hole" into which the relationship between Stargas and Convergys could be put, the irresistible inference must be that a lease had been created between them. The fact that both of them denied the existence of any such lease was immaterial.

[24] Kingston's secondary argument related to Stargas' call upon them to accept a lease "to take effect from 22 October 2002". Since Convergys were in legal occupation of the subjects at that date, Stargas could not offer vacant possession and could not therefore require Kingston to accept a lease.

[25] At the hearing before us, counsel for Kingston advanced a new argument which had not been put to the Lord Ordinary. Counsel for Stargas and Convergys did not object to this argument being advanced while reserving their position as to the possible consequences if it were held to be well-founded.

[26] Kingston's new argument was that, read together, the Notwithstanding clause of the Lease and the second sentence of Clause 6 of the Guarantee (beginning with the words "The Guarantors hereby further bind and oblige themselves") had the following effect. If the tenant went into receivership, the receiver had 21 days within which to take up the Lease. If he did not do so, he must be taken to have "refused to adopt" or "disclaimed" the Lease. The landlord then had three months within which to call on the guarantor to accept a new lease.

[27] In the present case, the receivers did not take up the Lease within 21 days from the date of receivership. The period of 21 days plus three months from the date of the receivership had expired long before 10 January 2003, when Stargas' solicitors' called on Kingston to accept a new lease. The call was therefore out of time and so, even if there was no new lease in favour of Convergys, Kingston could not, as guarantors, be required to accept a new lease. Stargas was therefore not entitled to decree in terms of the second head of its first conclusion or its third conclusion.

The arguments for Stargas and Convergys
[28] Stargas and Convergys made common cause and it is unnecessary to set out their arguments separately.

[29] Their argument started from the relevant statutory provisions. The effect of receivership on a contract of the company was that

"Any contract entered into on behalf of the company prior to the appointment of a receiver continues in force (subject to its terms) notwithstanding that appointment, but the receiver does not by virtue only of his appointment incur any personal liability on any such contract" (Insolvency Act 1986, Section 57(4)).

"A receiver is deemed to be the agent of the company in relation to such property of the company as is attached by the floating charge by virtue of which he was appointed" (Section 57(1))

and

"is personally liable on any contract entered into by him in the performance of his functions" (Section 57(2)).

[30] The effect of the statutory provisions was that the receivers did not incur personal liability in respect of the tenants' obligations under the Lease unless they "adopted" the contract as their own. Only if they adopted the Lease could Stargas as landlords look to them for payment of rent and performance of other obligations. But the contract continued as between Stargas and the company in receivership for so long as the Stargas did not take steps to bring it to an end under the irritancy clause. A landlord might find it commercially sound to allow a company in receivership to continue as tenant, even if the receiver did not accept personal liability.

[31] As regards the Notwithstanding clause, its effect was to make it possible for the receivers to prevent Stargas invoking the irritancy clause for a period of six months, provided (a) that the receivers gave notice within 21 days and (b) undertook full responsibility for payment of rent, etc. If the receivers did not invoke the clause, and for so long as Stargas did not invoke the irritancy clause, the Lease continued.

[32] As regards occupation of the subjects by Convergys, this might or might not have involved a breach of Clause 4.28.1 or 4.28.2 of the Lease, which would have entitled Stargas to invoke the irritancy clause, but it did not bring the Lease to an end or create a new lease in favour of Convergys.

[33] A lease being a consensual contract, renunciation of an existing lease required the consent of both parties (Stair II.9.35). Renunciation might be inferred from conduct of the parties plainly implying their final intention that the lease should be terminated (Stair Encyclopaedia, Vol. 13, para. 440 and references there cited.)

[34] As regards the creation of a new lease, Morrison-Low v Paterson (supra) concerned a protected agricultural tenancy. The circumstances were in any event very special, "pointing unmistakably to some agreement having been in effect" (Lord Fraser at page 75) and yielding "an inescapable inference that a tenancy has been brought into existence" (Lord Keith at page 78).

"The inquiry must always be, where there is no direct evidence of a contract of lease entered into at a particular time, whether the whole circumstances are only to be explained upon the basis that both parties must have agreed to the creation of the essential relationship of landlord and tenant in respect of defined subjects" (Strachan v Robertson-Coupar, 1989 S.C. 130, per Lord President Emslie, delivering the Opinion of the Court, at page 134).

The effect of the authorities was summarised by Lord Kingarth in Knapdale (Nominees) Ltd v Donald, 2002 S.L.T. 617, at page 623, para. [21].

[35] As regards the letter of 14 October 2002 from the receivers to ATIS and acceptance by Stargas of the cheque tendered with that letter, a landlord was entitled to accept payment of rent from the person who offered it without, by receiving it, discharging the tenant (Copeland v Wattss and Another, (1815) 1 Stark. 95). This was not a case where a sum had been tendered by way of compromise and accepted by the other party, or where payment had been tendered subject to a condition and had been accepted without disclaimer of the condition (Smith & Archibald v Ryness (1929), reported only in 1937 S.L.T. (News) 81, and helpfully analysed by Sheriff Principal Bryden in Gilbey Vintners Scotland Ltd. v Perry 1977 S.L.T. (Sh. Ct.) 48; cf. Modelux Linen Services Ltd v Redburn Hotel Ltd, 1985 S.L.T. (Sh. Ct.) 60).

[36] In any event, the letter of 21 October 2002 from the solicitors for Stargas to the joint receivers made it clear that Stargas were not agreeing to any suggestion that the lease to KSCL was at an end or that a new lease had been created in favour of Convergys. Moreover, the rent tendered with the letter of 14 October 2002 was in part for a period before the date of the receivership and in part for a period before occupation of the subjects by Convergys.

[37] As regards the limit of three months within which Stargas were entitled, under Clause 6 of the Guarantee, to call on Kingston to accept a lease of the subjects, the receivers' refusal to "adopt" the lease was communicated by the email of 22 October 2002. But even if the earlier letter of 14 October 2002 were to be taken as the refusal to adopt, the three month time limit had not expired by 10 January 2003, when Stargas' solicitors called on Kingston to execute a new lease in the same terms as the existing lease.

Decision
[38] In seeking to interpret the terms of the Lease and the Guarantee as they apply in the case of receivership, it is important to set those deeds in context. The purpose of receivership is to afford the possibility that, by prudent management of the company's business by the receiver, the claims of the floating chargeholder can be satisfied and the company continue in business. It is consistent with that purpose that contracts of the company should continue in force during the receivership and that the receiver should be deemed to be the agent of the company. However, unless the receiver assumes personal liability for the company's contractual obligations (such as payment of rent in respect of a lease), the company's creditors can look only to the company for performance of those obligations.

[39] So a party contracting with a company may, as in the present case, stipulate that, in the event of the company going into receivership, he will have the option of bringing the contract to an end. If he does not do so, the contract will continue. Correspondingly, the receiver (normally indemnified by the floating chargeholder) may decide that it would be profitable to "adopt" the company's contract and assume personal liability for its obligations, so avoiding the risk that the other party will bring the contract to an end.

[40] Thus the irritancy clause in a lease such as the present will protect the landlord against the risk that the tenant company can remain in possession of the subjects without paying rent and without the receiver assuming liability for payment. Correspondingly, a clause such as the Notwithstanding clause makes it possible for the receiver to avoid the lease being brought immediately to an end so as to give time to find a substitute tenant, who might, for example, be a party interested in taking over the business of the company.

[41] It is, however, a condition of the Notwithstanding clause that the receiver give notice within 21 days of the intention to invoke it and that he assume personal liability for payment of the rent and other obligations. In the present case, that was not done although it appears that there were negotiations for the Lease to be assigned to Convergys who had purchased the business of the company from the receivers.

[42] Kingston contended that, because the joint receivers did not invoke the Notwithstanding clause, that constituted "refusal or disclaimer" of the Lease for the purposes of Clause 6 of the Guarantee. But that is to misunderstand the scheme of the Lease.

[43] The consequence of not invoking the Notwithstanding clause was simply that that clause did not come into operation. So the receivers did not get the benefit of six months' grace to find an alternative tenant. But it was still open to them to accept personal liability for the tenants' obligations under the Lease. It was equally open to Stargas to invoke the irritancy clause at any time, which they could not have done if the receivers had invoked the Notwithstanding clause.

[44] In short, the Notwithstanding clause not having been invoked by the receivers, it did not come into operation and the parties' obligations under the contract remained otherwise entire. The new argument based on the Notwithstanding clause is therefore unsound and need not be considered further.

[45] The principal argument for Kingston was that the Court should draw the inference from the letter of 14 October 2002, and from acceptance by Stargas of the cheque tendered with that letter in the knowledge that Convergys were in occupation of the subjects, that Stargas had, at some unspecified date before 14 October, renounced the Lease in favour of KSCL and granted a new Lease in favour of Convergys. In any event, Stargas could not have given vacant possession to Kingston while Convergys were in lawful occupation and so could not call upon Kingston to accept a lease as concluded for. These arguments depended essentially on the proposition which Kingston claimed to derive from the speech of Lord Fraser in Morrison-Low (supra), namely, that if Convergys were not mere squatters, they must be tenants of Stargas.